This is actually two appeals which deal with an important question about insolvency and bankruptcy and whether monies that form part of the bankruptcy can be counted as arrears of rent for the purposes of obtaining possession.
Both Ms Sharples and Mr Godrey were assured tenants of their respective landlords and both were in arrears of rent. Ms S had possesion proceedings commenced against her but these were adjourned generally on condition she made monthly payments. She failed to do so but then declared bankruptcy prior to the reinstated proceedings being heard. Mr G had a Debt Relief Order (DRO) approved by the Insolvency Service prior to the first hearing of his landlord’s claim for possession for arrears of rent.
In the case of Ms S it was argued at first instance that s285(3) of the Insolvency Act 1986 precluded the making of an order against her in respect of arrears that formed part of her bankruptcy. For Mr G it was argued that proceedings against him should be stayed due to the DRO. Both arguments failed and possession orders were made, Mr G’s being suspended on condition that he paid the future rent and a regular sum toward the arrears. The tenants duly appealed, their cases being consolidated in the Court of Appeal.
The Insolvency Act protects the property and estate of a bankrupt from action being levied against it. The bankrupt is required to deliver all his (or her in this case) estate up to the trustee in bankruptcy and it then vests in the trustee. Assured tenancies are exempt form this provision in part and will not vest in the trustee unless the trustee specifically serves notice vesting the tenancy in himself.
Ms S’ appeal turned on two specific pieces of legislation. First on the wording of s285 Insolvency Act 1986 which reads (so far as is relevant):
(3) After the making of a bankruptcy order no person who is a creditor of the bankrupt in respect of a debt provable in the bankruptcy shall –
(a) have any remedy against the property or person of the bankrupt in respect of that debt, or
(b) before the discharge of the bankrupt, commence any action or other legal proceedings against the bankrupt except with the leave of the court and on such terms as the court may impose.
This is subject to sections 346 (enforcement procedures) and 347 (limited right to distress).
(6) References in this section to the property or goods of the bankrupt are to any of his property or goods, whether or not comprised in his estate.
and Ground 8, Schedule II, Housing Act 1988 which reads:
Both at the date of the service of the notice under section 8 of this Act relating to the proceedings for possession and at the date of the hearing
(a) if rent is payable weekly or fortnightly, at least eight weeks rent is unpaid;
(b) if rent is payable monthly, at least two months rent is unpaid;
(c) if rent is payable quarterly, at least one quarter’s rent is more than three months in arrears; and
(d) if rent is payable yearly, at least three months’ rent is more than three months in arrears;
and for the purpose of this ground “rent” means rent lawfully due from the tenant.
It was contended for Ms S that s285(3)(a) precluded the granting of a possession order as this would be a remedy granted to the landlord in respect of the debt covered by the bankruptcy and the Assured tenancy was clearly property protected by that sub-section. Further, Ground 8 was not made out as no rent was ‘lawfully due’ from the tenant, in fact no rent was due at all. Finally, there was a public policy argument in favour of protecting Assured tenants from being made homeless where they had declared bankruptcy in respect of their debts and this was surely the entire point of the IA.
The Court of Appeal disagreed and held that the making of a possession order was not in fact a remedy precluded by the IA. Three key principles were set out:
First, the grant of a tenancy, including an assured tenancy, creates a property interest in the tenant which is an incumbrance on the landlord’s title. An order for possession is a remedy which restores to the landlord full proprietary rights, including rights of occupation and letting, in respect the property. Secondly, the failure to pay rent is a breach of a contractual obligation. Neither forfeiture, nor a court order for possession, nor recovery of possession by the landlord, nor an order for bankruptcy, eliminates the personal indebtedness constituted by the rent arrears. Thirdly, it follows, as a matter of general principle, that an order for possession of property, whether let under an ordinary contractual tenancy or a secure tenancy or an assured tenancy, is not a remedy “in respect of” the debt represented by the rent arrears which gave the landlord an entitlement to the order for possession.
It followed from these principles that a possession order was not a remedy in respect of the debt because it was not designed to enforce payment of the debt which is what the IA was actually intended to prevent. It was a remedy in respect of the property by allowing the landlord to free himself of the incumbrance of the tenancy. The public policy argument of maintaining the right of Assured tenants to stay in their home was given careful consideration but it was felt by the Court that this was a matter for housing legislation and the careful balance struck in that legislation should not be upset by legislation designed to deal with personal insolvency.
Many of the same arguments were adopted for Mr G but his case was said to be stronger because the wording of s251G, IA 1986 (which deals with DROs) is not qualified as s285 is because it prohibits any remedy in respect of the debt rather than limiting it to the property and person of the bankrupt. Furthermore the order against Mr G did not rely on the mandatory Ground 8 but on a discretionary ground for possession, Ground 10.
However, the reasoning that the Court had followed in dealing with Ms S was relatively simply extended to deal with Mr G. However, it was wrong for the order to be suspended on condition that payments were made toward the arrears as this would offend against the insolvency legislation as regards past indebtedness for reasons which are outlined above.
I have adopted the Court’s excellent summary of its findings:
(1) an order for possession of property subject to a tenancy, including an assured tenancy, on the ground of arrears of rent, which are provable in the bankruptcy of the tenant, is not a “remedy … in respect of that debt” within IA s. 285(3)(a);
(2) that is so, whether the order is an outright order for possession or is a conditional suspended possession order;
(3) IA s.285(3)(b) is implicitly limited to legal proceedings against the bankrupt “in respect of that debt”; that is to say, it is qualified in the same way as IA s.285(3)(a);
(4) accordingly, proceedings for an order for possession of property subject to a tenancy, including an assured tenancy, on the ground of rent arrears, in which no claim is made for arrears provable in the tenant’s bankruptcy, are not subject to the automatic stay in IA s.285(3)(b);
(5) an order for possession of property subject to a tenancy, including an assured tenancy, on the ground of arrears of rent, which are the subject of the tenant’s DRO, is not a “remedy in respect of the debt” within IA s. 251G(2)(a), whether the order is an outright order for possession or is a conditional suspended possession order;
(6) proceedings for possession of property subject to an assured tenancy on the ground of rent arrears, which are provable in the tenant’s bankruptcy or are the subject of the tenant’s DRO, should not normally be stayed under IA s. 285(1) or (2) or IA s. 251G(3);
(7) on the hearing of such proceedings, no order can be made for payment of such arrears; nor should a suspended order for possession be made conditional on payment of such arrears, but it should be made conditional on payment of any other arrears (i.e. those not provable in the bankruptcy or subject to the DRO) and current rent.
So the appeal of Ms S was dismissed and Mr G’s suspended order stayed in force but was varied so that he did not have to make payments to the arrears of rent. Given the current economic conditions this decision is likely to have wide consequences and will cause disappointment to many tenants and relief to their landlords.